Monday, July 20, 2009

Spreads were tighter in the US as all the indices improved (with HY at new contract highs but IG staying wide of its tightest levels as the S&P closed at 2009 highs - although VIX is massively lower than the 60% levels last seen when SPY was here). Indices typically underperformed single-names (as a late day pick up in single-name activity suggest some index arb flows at play) with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, XO underperformed but compressed the skew, and HY outperformed but narrowed the skew.

The names having the largest impact on IG are CIT Group Inc (-615.69bps with an intraday swing of over 400bps from open tight to wides to close tight) pushing IG 2.67bps tighter, and ERP Operating LP (+5.5bps) adding 0.04bps to IG. HVOL is more sensitive with CIT Group Inc pushing it 11.98bps tighter, and ERP Operating LP contributing 0.19bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both National Rural Utilities Cooperative Finance Corporation (-30.79bps) pushing the index 0.31bps tighter, and MDC Holdings Inc (+1.39bps) adding 0.01bps to ExHVOL.

The price of investment grade credit rose 0.26% to around 98.95% of par, while the price of high yield credits rose 1.0575% to around 86.19% of par. ABX market prices are higher (improving) by 0.16% of par or in absolute terms, 0.43%. Broadly speaking, CMBX market prices are higher (improving) by 0.06% of par or in absolute terms, 0.02%. Volatility (VIX) is up 0.05pts to 24.34%, with 10Y TSY rallying (yield falling) 3.9bps to 3.61% and the 2s10s curve flattened by 2.2bps, as the cost of protection on US Treasuries rose 0.76bps to 35.76bps. 2Y swap spreads tightened 0.4bps to 47.06bps, as the TED Spread tightened by 0.2bps to 0.34% and Libor-OIS improved 0.5bps to 30.8bps.

The Dollar weakened with DXY falling 0.61% to 78.864, Oil rising $0.7 to $64.26 (outperforming the dollar as the value of Oil (rebased to the value of gold) fell by 0.32% today (a 0.49% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $13.4 to $950.9 as the S&P rallies (948.6 1.25%) outperforming IG credits (125bps 0.26%) while IG, which opened tighter at 125bps, underperforms HY credits. IG11 and XOver11 are -10.59bps and -22.32bps respectively while ITRX11 is -4.28bps to 103bps.

Dispersion fell 45.7bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

79% of IG credits are shifting by more than 3bps and 75% of the CDX universe are also shifting significantly (more than the 5 day average of 59%). The number of names wider than the index stayed at 42 as the day's range fell to 3.63bps (one-week average 6.28bps), between low bid at 124.375 and high offer at 128 and higher beta credits (-5.77%) underperformed lower beta credits (-6.31%).

In IG, wideners were massively outpaced by tighteners at around 20-to-1, with only 4 credits notably wider. By sector, CONS saw 0% names wider, ENRGs 0% names wider, FINLs 5% names wider, INDUs 11% names wider, and TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 103.75bps and the latter at 107.82bps.

Cross Market, we are seeing the HY-XOver spread compressing to 221.6bps from 234.66bps, and remains below the short-term average of 225.02bps, with the HY/XOver ratio falling to 1.33x, above its 5-day mean of 1.31x. The IG-Main spread compressed to 22bps from 23.72bps, but remains above the short-term average of 20.54bps, with the IG/Main ratio falling to 1.21x, above its 5-day mean of 1.18x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 6.9bps to 107.8bps, with 100 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 12.17bps to 127.22bps, with Brokers (worst) tighter by 11bps to 142.2bps, Banks (best) tighter by 14.57bps to 168.83bps, and Finance names tighter by 85.28bps to 823.88bps. Monolines are trading tighter on average by -185.74bps (5.68%) to 2644.55bps.

In IG, FINLs outperformed non-FINLs (8.28% tighter to 6.02% tighter respectively), with the former (IG FINLs) tighter by 31.3bps to 346.7bps, with 20 of the 21 names tighter. The IG CDS market (as per CDX) is 25.4bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (99.62bps), with the bond ETFs underperforming the IG CDS market by around 6.48bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 3.83bps to 103.75bps (with ITRX FINLs -trending tighter- better by 6.09 to 100bps) and is currently trading tight to its week's range at 0%, between 123.44 to 103.75bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at -0.01%, between 89.67 to 73.16bps. ExHVOL outperformed LoVOL as the differential compressed to -9.11bps from -6.74bps, but remains above the short-term average of -9.23bps. The Main exFINLS to IG ExHVOL differential decompressed to 39.7bps from 37.84bps, but remains below the short-term average of 41.65bps.

Spreads were tighter in the US as all the indices improved (with HY at new contract highs but IG staying wide of its tightest levels as the S&P closed at 2009 highs - although VIX is massively lower than the 60% levels last seen when SPY was here). Indices typically underperformed single-names (as a late day pick up in single-name activity suggest some index arb flows at play) with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, XO underperformed but compressed the skew, and HY outperformed but narrowed the skew.

The names having the largest impact on IG are CIT Group Inc (-615.69bps with an intraday swing of over 400bps from open tight to wides to close tight) pushing IG 2.67bps tighter, and ERP Operating LP (+5.5bps) adding 0.04bps to IG. HVOL is more sensitive with CIT Group Inc pushing it 11.98bps tighter, and ERP Operating LP contributing 0.19bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both National Rural Utilities Cooperative Finance Corporation (-30.79bps) pushing the index 0.31bps tighter, and MDC Holdings Inc (+1.39bps) adding 0.01bps to ExHVOL.

The price of investment grade credit rose 0.26% to around 98.95% of par, while the price of high yield credits rose 1.0575% to around 86.19% of par. ABX market prices are higher (improving) by 0.16% of par or in absolute terms, 0.43%. Broadly speaking, CMBX market prices are higher (improving) by 0.06% of par or in absolute terms, 0.02%. Volatility (VIX) is up 0.05pts to 24.34%, with 10Y TSY rallying (yield falling) 3.9bps to 3.61% and the 2s10s curve flattened by 2.2bps, as the cost of protection on US Treasuries rose 0.76bps to 35.76bps. 2Y swap spreads tightened 0.4bps to 47.06bps, as the TED Spread tightened by 0.2bps to 0.34% and Libor-OIS improved 0.5bps to 30.8bps.

The Dollar weakened with DXY falling 0.61% to 78.864, Oil rising $0.7 to $64.26 (outperforming the dollar as the value of Oil (rebased to the value of gold) fell by 0.32% today (a 0.49% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $13.4 to $950.9 as the S&P rallies (948.6 1.25%) outperforming IG credits (125bps 0.26%) while IG, which opened tighter at 125bps, underperforms HY credits. IG11 and XOver11 are -10.59bps and -22.32bps respectively while ITRX11 is -4.28bps to 103bps.

Dispersion fell 45.7bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

79% of IG credits are shifting by more than 3bps and 75% of the CDX universe are also shifting significantly (more than the 5 day average of 59%). The number of names wider than the index stayed at 42 as the day's range fell to 3.63bps (one-week average 6.28bps), between low bid at 124.375 and high offer at 128 and higher beta credits (-5.77%) underperformed lower beta credits (-6.31%).

In IG, wideners were massively outpaced by tighteners at around 20-to-1, with only 4 credits notably wider. By sector, CONS saw 0% names wider, ENRGs 0% names wider, FINLs 5% names wider, INDUs 11% names wider, and TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 103.75bps and the latter at 107.82bps.

Cross Market, we are seeing the HY-XOver spread compressing to 221.6bps from 234.66bps, and remains below the short-term average of 225.02bps, with the HY/XOver ratio falling to 1.33x, above its 5-day mean of 1.31x. The IG-Main spread compressed to 22bps from 23.72bps, but remains above the short-term average of 20.54bps, with the IG/Main ratio falling to 1.21x, above its 5-day mean of 1.18x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 6.9bps to 107.8bps, with 100 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 12.17bps to 127.22bps, with Brokers (worst) tighter by 11bps to 142.2bps, Banks (best) tighter by 14.57bps to 168.83bps, and Finance names tighter by 85.28bps to 823.88bps. Monolines are trading tighter on average by -185.74bps (5.68%) to 2644.55bps.

In IG, FINLs outperformed non-FINLs (8.28% tighter to 6.02% tighter respectively), with the former (IG FINLs) tighter by 31.3bps to 346.7bps, with 20 of the 21 names tighter. The IG CDS market (as per CDX) is 25.4bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (99.62bps), with the bond ETFs underperforming the IG CDS market by around 6.48bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 3.83bps to 103.75bps (with ITRX FINLs -trending tighter- better by 6.09 to 100bps) and is currently trading tight to its week's range at 0%, between 123.44 to 103.75bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at -0.01%, between 89.67 to 73.16bps. ExHVOL outperformed LoVOL as the differential compressed to -9.11bps from -6.74bps, but remains above the short-term average of -9.23bps. The Main exFINLS to IG ExHVOL differential decompressed to 39.7bps from 37.84bps, but remains below the short-term average of 41.65bps.